108 T.C. No. 14

UNITED STATES TAX COURT

MICHAEL FERGUSON AND VALENE FERGUSON, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

ROGER N. FERGUSON AND SYBIL FERGUSON, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 21808-93, 18250-94. Filed April 28, 1997.

Held: Ps donated to various charitable

organizations (the Charities) appreciated stock in C1. 

Prior to the gifts, C1 and C2 entered into a merger

agreement, C2 made a tender offer for the shares of C1,

and shares of C1 sufficient to approve the merger were

tendered or guaranteed. The Charities subsequently

sold the stock of C1 received from Ps pursuant to the

tender offer. Ps are taxable on the gain in the stock

transferred to the Charities under the anticipatory

assignment of income doctrine.

David R. Bosse, for petitioners.

Robert First (specially recognized) for petitioners.
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Stephen M. Miller, for respondent.

HALPERN, Judge: These consolidated cases involve the

following determinations by respondent of deficiencies in,

additions to, and penalties on petitioners' Federal income tax:

Docket No. 21808-93 Michael Ferguson and Valene Ferguson

 Additions to Tax and Penalties 

Sec. Sec. Sec. Sec.

Year Deficiency 6653 6654 6661 6662

1987 $29,115 -- -- -- $5,823

1988 1,249,580 $36,491 $94,384 $182,456 103,951

1989 117,227 -- -- -- 23,445

1990 75,197 -- -- -- 15,039

1991 66,942 -- -- -- 13,388

 

Docket No. 18250-94 Roger N. Ferguson and Sybil Ferguson

 Additions to Tax and Penalties 

Sec. Sec. Sec. Sec. Sec.

Year Deficiency 6653(a)(1) 6659 6661 6662(a) 6621(c)

1988 $2,017,297 $170,767 $427,524 $163,701 -- 

1

1989 160,451 -- -- -- $50,353 --

1991 624,490 -- -- -- 127,120 --

1120% of interest due on $1,425,079

Certain adjustments having been agreed to and concessions made,

the sole issue remaining for decision is whether petitioners are

taxable on the gain in appreciated stock transferred to various

charitable organizations under the anticipatory assignment of

income doctrine.

Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.
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FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of fact and the supplemental stipulation of fact

filed by the parties, both with attached exhibits, are

incorporated herein by this reference. Petitioners Michael and

Valene Ferguson and Roger and Sybil Ferguson resided in Rexburg,

Idaho, at the time their petitions herein were filed. 

Background

On January 17, 1972, Four Star, Inc. (Four Star), was

incorporated under the laws of the State of Idaho. All of the

stock of Four Star was owned by Roger and Sybil Ferguson and two

other shareholders. On March 10, 1972, Roger and Sybil Ferguson

purchased all of the stock of Four Star owned by the two other

shareholders. In March 1975, the corporate name of Four Star was

changed to Diet Center, Inc. (Diet Center). From 1975 to

March 31, 1985, Roger Ferguson, Sybil Ferguson, and their son,

Michael Ferguson, were president, secretary/treasurer, and

executive vice-president of Diet Center, respectively, and those

individuals constituted the board of directors of Diet Center. 

American Health Companies, Inc. (AHC), was incorporated

under the laws of the State of Delaware on March 8, 1983. On or

about April 1, 1985, AHC acquired, through a series of corporate

transactions, Diet Center, which, theretofore, had been wholly
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owned by petitioners Roger and Sybil Ferguson and their five

children, including petitioner Michael Ferguson. 

In June 1986, pursuant to a public offering, AHC and certain

of its shareholders sold 3,000,000 shares of AHC stock. 

AHC, through franchises operating under the name of Diet

Center, provided weight loss and diet counseling services and

marketed a variety of vitamins, minerals, and food products. 

As of July 28, 1988, there were 6,952,863 issued and

outstanding shares of AHC stock, and members of the Ferguson

family owned approximately 1,309,500 (18.8 percent) of those

shares. Roger and Sybil Ferguson owned approximately 656,000

shares (9.4 percent), and Michael Ferguson owned approximately

520,000 shares (7.5 percent). From April 1, 1985, through at

least September 15, 1988, Roger Ferguson served as consultant for

AHC, Sybil Ferguson was employed as president of Diet Center, and

Michael Ferguson was employed as president of AHC. From

January 1, 1988, through July 28, 1988, the board of directors of

AHC consisted of, among other individuals, Roger Ferguson

(Chairman), Sybil Ferguson (Vice Chairperson), Michael Ferguson,

and C. Stephen Clegg. 

Merger Agreement and Tender Offer

In December 1987, after informal discussions among the

members of the board of directors of AHC, C. Stephen Clegg

contacted Goldman, Sachs & Co. (Goldman, Sachs) in connection

with a possible sale of AHC. A letter agreement was executed on
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March 4, 1988, authorizing Goldman, Sachs, among other things, to

search for a purchaser of AHC and to assist in the sale

negotiations. By July 22, 1988, Goldman, Sachs received four

proposals.

On July 28, 1988, AHC, CDI Holding, Inc. (CDI), which was a

corporation owned by Thomas H. Lee Co. and ML-Lee Acquisition

Fund, L.P., and DC Acquisition Corp. (DC Acquisition), which was

a wholly owned subsidiary of CDI, entered into an agreement and

plan of merger (the merger agreement). The merger agreement

provided that, as soon as practicable after DC Acquisition had

purchased the stock of AHC by means of a tender offer of $22.50 a

share, DC Acquisition would be merged into AHC, and AHC would

thereupon become a wholly owned subsidiary of CDI. According to

the merger agreement, each outstanding share of AHC stock would

be converted into the right to receive $22.50 in cash.

It was expected that, upon consummation of the merger, Roger

and Sybil Ferguson would become members of the executive

committee of AHC and the board of directors of CDI, and Sybil

Ferguson would become president of AHC. In addition, Roger and

Sybil Ferguson and their children, including Michael Ferguson,

were offered the opportunity to make an equity investment in CDI

by means of an exchange of AHC stock or options for securities of

CDI. 

The board of directors of AHC, with Roger Ferguson, Sybil

Ferguson, and Michael Ferguson abstaining, unanimously authorized
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and approved of the merger agreement, determined that $22.50 a

share was a fair price, and recommended acceptance of the offer

to the shareholders of AHC. The obligation of AHC to effect the

merger was subject to various conditions, including approval of

the merger agreement by shareholders owning a majority of AHC

stock. The authority of AHC shareholders to withhold approval of

the merger was limited by the right of DC Acquisition and CDI to

proceed with the merger upon acquisition of a majority of the

outstanding shares. The terms of the tender offer provided:

Pursuant to the Certificate of Incorporation, as

amended, of the Company [AHC] and the Delaware Law, if

the Purchaser [DC Acquisition] acquires pursuant to the

Offer a majority of the outstanding Shares, then the

Purchaser will be able to assure that the requisite

number of affirmative votes in favor of the Merger will

be received even if no other stockholder votes in favor

of the Merger. Pursuant to the short form merger

provisions of the Delaware law, if the Purchaser holds

90% or more of the outstanding Shares, the Merger can

be effected, and the Purchaser intends to effect the

Merger, without a meeting or vote of the stockholders

of the Company.

The obligation of DC Acquisition and CDI to effect the

merger was also subject to various conditions. On August 3,

1988, pursuant to a tender offer, DC Acquisition offered to

purchase all of the issued and outstanding AHC stock for $22.50 a

share. The tender offer was conditioned on DC Acquisition’s

acquiring and owning at least 85 percent of the AHC stock upon

consummation of the tender offer (minimum tender condition). The

minimum tender condition could be waived by DC Acquisition in its

sole discretion. DC Acquisition and CDI also had the right to
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terminate or amend the tender offer upon the occurrence of

material adverse changes affecting AHC. The original expiration

date for the tender offer was August 30, 1988, but the expiration

date was extended to September 9, 1988, as a result of a fire

that totally destroyed the AHC product manufacturing plant on

August 25, 1988. 

On August 3, 1988, a letter, signed by Roger and Sybil

Ferguson as co-chairpersons of AHC, was sent to all shareholders

of record. That letter stated, among other things:

Your Board of Directors has determined that each of the

DC Acquisition offer and merger is fair to the

shareholders of American Health and recommends that all

shareholders accept the offer and tender their shares

to DC Acquisition. 

The supplement to the offer to purchase, dated August 22,

1988, filed with the Securities and Exchange Commission (SEC) as

an exhibit to schedule 14D-9, and signed by Michael Ferguson,

states:

The Fergusons have advised the Parent [CDI], subject to

applicable securities laws, that they will purchase the

stock in Parent by means of an exchange of Shares they

hold in the Company [AHC], valued at $22.50 per share,

for an amount of stock in Parent of equivalent value. 

Subject to applicable securities laws, Sybil and Roger

Ferguson and Michael D. Ferguson have advised the

Parent and the Company that they will tender all of

their Shares not exchanged for stock in the Parent.

Sybil Ferguson is expected to become President of the 

Company following the consummation of the Offer. It is

anticipated that she will enter into a three year

employment agreement with the Company pursuant to which

she will receive an annual salary of $200,000. 

Pursuant to the agreement, she will be a full time

employee and will be eligible to participate in an
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executive incentive plan and a long term incentive plan

which are expected to be developed by the Board of

Directors for participation by key members of senior

management. The agreement with Sybil Ferguson is

expected to contain appropriate non-competition

covenants.

Roger Ferguson's present consulting agreement with

the Company is expected to be extended on its present

terms so that it will expire at the same time as the

employment agreement with Mrs. Ferguson. Mr. Ferguson

is also expected to agree to non-competition covenants

similar to those of Mrs. Ferguson.

Although the parties have reached general

understandings with respect to the foregoing matters,

no written agreements have been entered into. * * * 

The continued involvement of Sybil Ferguson in the activities of

AHC was an important aspect of the acquisition of AHC by CDI and

DC Acquisition.

The supplement to the offer to purchase also stated that the

$22.50 a share offer price represented a multiple of

approximately 16 times AHC's earnings a share for the year ended

March 31, 1988, a 24.1 percent premium over the market price for

the shares as of July 22, 1988 (the last trading day prior to the

announcement by AHC that it had received bids from prospective

acquirors), and a premium of approximately 1,084 percent over the

tangible book value of AHC shares as of June 30, 1988. In

addition, the supplement stated that, as of March 31, 1988, the

total book value a share of outstanding common stock exclusive of

treasury shares was $6.59, and such book value a share, exclusive

of goodwill, was $1.94. 
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The terms of the tender offer provided that “No stockholder

of the Company [AHC] has executed any agreement obligating him to

tender Shares to the Purchaser [DC Acquisition] in response to

the Offer.” The terms of the tender offer provided that shares

tendered pursuant to the tender offer could be withdrawn, upon

valid notice, at any time prior to the expiration date of the

tender offer. 

Pursuant to the tender offer, the stock of AHC was tendered

by AHC shareholders in the following manner:

 Close of

Business Date

 Shares 

Tendered

 Shares 

Guaranteed

Percentage of

Outstanding

Shares

Tendered or

Guaranteed 

 8/15/88 33,924 -- 0.5

 8/16/88 104,024 -- 1.5

 8/17/88 318,678 -- 4.6

 8/18/88 707,306 -- 10.2

 8/19/88 723,886 -- 10.4

 8/22/88 952,554 -- 13.7

 8/24/88 1,594,736 -- 22.9

 8/25/88 1,824,674 -- 26.2

 8/26/88 2,189,329 -- 31.5

 8/29/88 2,731,041 -- 39.3

 8/30/88 2,894,132 -- 41.6

 8/31/88 3,596,997 31,032 52.2

 9/1/88 3,627,605 31,172 52.6

 9/2/88 3,638,046 31,772 52.8

 9/6/88 3,704,602 2,019 53.3

 9/7/88 3,707,157 1,279 53.3

 9/8/88 3,976,886 1,279 57.2

 9/9/88 5,482,162 1,136,167 95.2

 9/12/88 5,650,081 968,248 95.2

 9/13/88 6,327,303 291,026 95.2

 9/14/88 6,381,140 237,189 95.2

 9/16/88 6,504,488 113,841 95.2

 9/19/88 6,529,273 89,056 95.2

 9/20/88 6,613,500 4,829 95.2
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Gifts by Michael Ferguson

On August 15, 1988, Michael Ferguson, in contemplation of a

tithing, executed a donation-in-kind record indicating his

intention to donate 30,000 shares of AHC stock to the Church of

Jesus Christ of the Latter Day Saints (the Church). On or about

August 16, 1988, Brett Floyd, a Merrill Lynch stockbroker,

assisted Michael Ferguson to open a new brokerage account and to

place 391,651 shares of AHC stock in that account. A legend

restricting transfer appeared on those shares, and Merrill Lynch

would not sell or otherwise transfer the shares until it was

advised that it could do so by its legal department; that

clearance process “took upwards of two weeks”. On or about

August 26, 1988, Michael Ferguson formed the Michael Ferguson

Charitable Foundation (MF Foundation). On September 8, 1988,

Brett Floyd caused an in-house journal entry to be made to

transfer from Michael Ferguson's brokerage account 30,000 shares

of AHC stock to an account maintained by the Church and 27,000

shares of AHC stock to the account maintained by the MF

Foundation. On September 9, 1988, Michael Ferguson executed an

authorization to transfer the shares that Brett Floyd transferred

by in-house journal entry the day before. A donation-in-kind

receipt issued to Michael Ferguson by the Church provides that

the date of donation for the 30,000 shares of AHC stock was

September 9, 1988. On October 5, 1988, Billy G. DuPree, Jr., an

officer of AHC, forwarded to the SEC a statement of changes in
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beneficial ownership of securities (SEC Form 4) with respect to

Michael Ferguson. That statement indicates that the gifts to the

Church and the MF Foundation occurred on September 9, 1988. 

Gifts by Roger and Sybil Ferguson

On August 21, 1988, Roger Ferguson, in contemplation of a

tithing, executed a donation-in-kind record indicating the

intention of Roger and Sybil Ferguson to donate 31,111 shares of

AHC stock to the Church. On or about August 23, 1988, Brett

Floyd assisted Roger and Sybil Ferguson to open a new brokerage

account and to place 341,366 shares of AHC stock in that account. 

A legend restricting transfer appeared on those shares, and

Merrill Lynch would not sell or otherwise transfer the shares

until it was advised that it could do so by its legal department;

that clearance process “took upwards of two weeks”. On

August 26, 1988, Roger and Sybil Ferguson formed the Roger and

Sybil Ferguson Charitable Foundation (R & S Foundation). On

September 8, 1988, Brett Floyd caused an in-house journal entry

to be made to transfer from Roger and Sybil Ferguson's brokerage

account 31,111 shares of AHC stock to an account maintained by

the Church and 26,667 shares of AHC stock to the account

maintained by the R & S Foundation. On September 9, 1988, Roger

and Sybil Ferguson executed an authorization to transfer the

shares that Brett Floyd transferred by in-house journal entry the

day before. On October 5, 1988, Billy G. DuPree, Jr., forwarded

to the SEC statements of changes in beneficial ownership of
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1 It should be noted that some of the AHC stock owned by

petitioners Roger and Sybil Ferguson and Michael Ferguson was

transferred to an entity named Silver Hawk, Inc. Those transfers

are not in issue in the present case.

securities (SEC Form 4) with respect to Roger and Sybil Ferguson. 

Those statements indicate that the gifts to the Church and the

R & S Foundation occurred on September 9, 1988. 

Consummation of the Transaction

On September 9, 1988, Roger and Sybil Ferguson exchanged

133,334 shares of AHC stock for 100,000 shares of CDI common

stock and 20,000 shares of CDI preferred stock, and they tendered

their remaining shares in accordance with the tender offer.1 On

September 9, 1988, Michael Ferguson exchanged 33,333 shares of

AHC stock for 25,000 shares of CDI common stock and 5,000 shares

of CDI preferred stock, and he tendered his remaining shares in

accordance with the tender offer. Other members of the Ferguson

family engaged in similar transactions. The various charities

that received shares of AHC stock from petitioners tendered those

shares on September 9, 1988.

On September 12, 1988, DC Acquisition announced its

acceptance of all the tendered or guaranteed shares of AHC stock. 

On September 13, 1988, DC Acquisition purchased the 6,618,329

tendered or guaranteed shares of AHC stock in exchange for $22.50

a share and became a shareholder of AHC. 

As a result of DC Acquisition’s acquiring in excess of

90 percent of the stock of AHC, the merger was effected on or
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about October 14, 1988, pursuant to a consent of the sole

director of DC Acquisition to a resolution stating the terms of

the merger, dated October 12, 1988. AHC thereupon became a

subsidiary of CDI. Sybil Ferguson became president of AHC, and

Roger Ferguson became a consultant for AHC. In addition, Roger

and Sybil Ferguson became members of AHC's executive committee

and CDI's board of directors. 

OPINION

I. Introduction

A. Issue

Petitioners donated appreciated stock in American Health

Companies, Inc. (AHC), to the Church of Jesus Christ of the

Latter Day Saints (the Church), the Michael Ferguson Charitable

Foundation, and the Roger and Sybil Charitable Foundation

(collectively, the Charities). The Charities subsequently sold

that stock to DC Acquisition Corp. (DC Acquisition) pursuant to a

tender offer. The sole issue for decision is whether petitioners

are taxable on the gain in the stock transferred to the Charities

under the anticipatory assignment of income doctrine. 

Petitioners bear the burden of proof. Rule 142(a).

B. Arguments of the Parties

Petitioners contend that they are not taxable on the gain in

the stock transferred to the Charities. First, relying on our

decision in Palmer v. Commissioner, 62 T.C. 684 (1974), affd. on
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other grounds 523 F.2d 1308 (8th Cir. 1975), petitioners assert

that the Charities were not legally obligated, nor could they be

compelled, to tender their AHC stock in accordance with the

tender offer, and, therefore, the proceeds received by the

Charities in exchange for AHC stock that was voluntarily tendered

cannot be attributed to petitioners. Second, relying primarily

on Hudspeth v. United States, 471 F.2d 275 (8th Cir. 1972), and

Estate of Applestein v. Commissioner, 80 T.C. 331 (1983),

petitioners assert that the date on which the right to the tender

offer proceeds matured was October 12, 1988, when the board of

directors of DC Acquisition adopted a resolution stating the

terms of the merger, and that the gifts occurred prior to that

date. Petitioners argue, alternatively, that the earliest date

on which the right to the tender offer proceeds matured was

September 12, 1988, when DC Acquisition formally announced that

it had accepted all of the tendered or guaranteed shares of AHC

stock, and that the gifts occurred prior to that date.

Respondent, relying primarily on our decisions in Estate of

Applestein and Peterson Trust v. Commissioner, T.C. Memo. 1986-

267, affd. without published opinion 822 F.2d 1093 (8th Cir.

1987), contends that the July 28, 1988, merger agreement (the

merger agreement) coupled with the August 3, 1988, tender offer

at a price of $22.50 a share (the tender offer) was, in reality

and substance, the functional equivalent to a shareholder vote
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approving the merger agreement and that the gifts occurred

subsequent thereto.

Resolution of the competing positions advanced by the

parties requires an analysis of the circumstances surrounding the

merger agreement, the tender offer, and the gifts to the

Charities. Based on the facts of this case, we believe that the

stock of AHC was converted from an interest in a viable

corporation to the right to receive cash prior to the date of the

gifts to the Charities, and, therefore, petitioners are taxable

on the gain in the donated stock.

II. Analysis

A. Date of the Gifts

Section 170(a) allows a deduction for any charitable

contribution payment of which is made within the taxable year. 

The term “charitable contribution” is defined in section 170(c)

as a contribution or gift to or for the use of various enumerated

entities and, therefore, is synonymous with the term “gift”. See

DeJong v. Commissioner, 36 T.C. 896, 899 (1961), affd. 309 F.2d

373 (9th Cir. 1962). Thus, the donation of AHC stock to the

Charities must satisfy the requirements of a valid inter vivos

gift in order to qualify as a charitable contribution under

section 170(a). See, e.g., Guest v. Commissioner, 77 T.C. 9, 15-

16 (1981). The existence of the gifts to the Charities, however,
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is not in dispute. The contested issue is the date of those

gifts.

Petitioners, relying on section 1.170A-1(b), Income Tax

Regs., assert that the gifts occurred when their AHC stock

certificates along with irrevocable instructions regarding their

donations to the Charities were delivered to Brett Floyd, who

served in the capacity of agent for the Charities. Thus,

petitioners contend that the gifts by Michael Ferguson occurred

on August 15, 1988, and that the gifts by Roger and Sybil

Ferguson occurred on August 21, 1988.

Section 1.170A-1(b), Income Tax Regs., provides:

Ordinarily, a contribution is made at the time delivery

is effected. * * * If a taxpayer unconditionally

delivers or mails a properly endorsed stock certificate

to a charitable donee or the donee's agent, the gift is

completed on the date of delivery or, if such

certificate is received in the ordinary course of the

mails, on the date of mailing. If the donor delivers

the stock certificate to his bank or broker as the

donor's agent, or to the issuing corporation or its

agent, for transfer into the name of the donee, the

gift is completed on the date the stock is transferred

on the books of the corporation. * * *

This Court in Londen v. Commissioner, 45 T.C. 106 (1965),

considered the application of section 1.170-1(b), Income Tax

Regs., the precursor to the regulation relied on by petitioners. 

In that case, the taxpayer delivered an executed stock

certificate to his agent (though the taxpayer argued that the

agent was the agent of the donee) and instructed the agent to

transfer the stock to a charity in December 1959; the transfer
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became effective in January 1960. The Court held that the date

on which the donor instructed his agent to transfer the stock to

the donee was not determinative of when the gift was complete. 

See id. at 110. Delivery of the gift of stock was complete upon

relinquishment of dominion and control of the stock by the donor,

which occurred upon actual transfer on the books of the issuing

corporation. Id.; Morrison v. Commissioner, T.C. Memo. 1987-112. 

The Court noted that even if the taxpayer's obligation upon

delivery to his agent “were a legal instead of a moral one, the

existence of an obligation is not synonymous with its

implementation.” Londen v. Commissioner, supra at 110.

First, the facts indicate that Brett Floyd acted as

petitioners' agent and not the Charities' agent. Brett Floyd not

only facilitated the transfer of AHC stock to the Charities, but

also assisted petitioners in the exchange of their AHC stock for

shares of CDI and the tender of their remaining shares in

accordance with the tender offer. The fact that Brett Floyd may

have assisted the Church on previous occasions does not change

the nature of his role with respect to the transactions involving

petitioners. When petitioners Roger and Sybil Ferguson and

Michael Ferguson placed, with the assistance of Brett Floyd,

341,366 and 391,651 shares of AHC stock in their respective

accounts, Brett Floyd acted as petitioners' agent. Second,

petitioners delivered to Brett Floyd stock that Merrill Lynch

would not immediately sell or otherwise transfer. Merrill
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Lynch's process for receiving clearance to sell or transfer the

shares “took upwards of two weeks”. Indeed, the authorizations

to transfer the stock to the Charities are dated September 9,

1988. The donation-in-kind receipt from the Church received by

petitioner Michael Ferguson provides that the date of donation

for the 30,000 shares of AHC stock was September 9, 1988. The

statements of changes in beneficial ownership of securities 

forwarded to the Securities and Exchange Commission by Billy G.

DuPree, Jr., indicate that the gifts occurred on September 9,

1988. Furthermore, petitioners have failed to explain how the

gifts to the charitable foundations occurred on August 15, 1988,

and August 21, 1988, respectively, when the foundations were

formed on or about August 26, 1988. Considering the substantial

documentary evidence, petitioners have failed to persuade us that

depositing stock in their brokerage accounts with instructions to

Brett Floyd to transfer some of the stock to the Charities

constituted the unconditional delivery of stock to a charitable

donee's agent pursuant to section 1.170A-1(b), Income Tax Regs.

In the alternative, petitioners, relying on Richardson v.

Commissioner, T.C. Memo. 1984-595, assert that petitioners'

transfer of the AHC stock to Brett Floyd created a voluntary

trust that completed the gifts on the date of delivery. In light

of our conclusion that Brett Floyd acted as petitioners' agent,

we reject petitioners' alternative argument.
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Based on the circumstances surrounding the gifts to the

Charities, we believe that Brett Floyd acted as petitioners'

agent in the transfer of the AHC stock and that petitioners

relinquished control of the stock on September 9, 1988, when the

letters of authorization were executed, and we so find. The

gifts to the Charities, therefore, were complete on September 9,

1988.

B. Anticipatory Assignment of Income

1. Case Law

It is a well-established principle of the tax law that the

person who earns or otherwise creates the right to receive income

is taxed. E.g., Lucas v. Earl, 281 U.S. 111, 114-115 (1930). 

When the right to income has matured at the time of a transfer of

property, the transferor will be taxed despite the technical

transfer of that property. E.g., Estate of Applestein v.

Commissioner, 80 T.C. at 345. The mere anticipation or

expectation of income at the time of transfer, however, is 

insufficient to create a fixed right to earned income. Id. The

reality and substance of a transfer of property govern the proper

incidence of taxation and not formalities and remote hypothetical

possibilities. E.g., Hudspeth v. United States, 471 F.2d at 277. 

It is the province of the trial court to determine the proper

characterization of a particular transaction upon consideration

of all the facts and circumstances. See United States v.

Cumberland Pub. Serv. Co., 338 U.S. 451, 456 (1950) (application
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of substance-over-form doctrine); Harrison v. Schaffner, 312 U.S.

579, 583 (1941) (application of assignment of income doctrine). 

In Hudspeth v. United States, supra, the taxpayer, who was

an 81.5-percent shareholder, a director, president, and treasurer

of a corporation, donated to various charitable organizations

stock in the corporation, which had previously adopted a plan of

liquidation pursuant to resolution by its board of directors and

ratification by the shareholders. The Court of Appeals for the

Eighth Circuit rejected the taxpayer's contention “that the date

of the gift preceded the time when an enforceable right to the

liquidation proceeds accrued (i.e., when the corporation's board

passed the final resolution of dissolution)” and, instead,

focused on the reality and substance of the events. Id. at 277,

280. Noting the taxpayer's continued control of the corporation

and the transferees' inability to vitiate the taxpayer's

intention to liquidate, the court determined that the affirmative

vote of the shareholders to liquidate the corporation was

sufficient to sever the gain from the stock such that the

transfer to the charities constituted a transfer of liquidation

proceeds rather than an interest in a viable corporation. Id. at

278-279. The court would not “eviscerate established principles

of anticipatory assignment of income by considering remote,

hypothetically possible abandonments in the face of unrebutted

evidence that the taxpayer intended to and did, in fact, complete

the liquidation of his corporation.” Id. at 280.
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In Kinsey v. Commissioner, 477 F.2d 1058 (2d Cir. 1973),

affg. 58 T.C. 259 (1972), the taxpayer donated to his alma mater

a controlling interest in a corporation that previously had

adopted a plan of liquidation pursuant to recommendation by its

board of directors and approval by its shareholders. The Court

of Appeals for the Second Circuit recognized that the

Commissioner's case in Hudspeth v. United States, supra, was

stronger because the donor in that case retained a majority of

the corporation's stock, but, nevertheless, applied the basic

principle in Hudspeth v. United States, supra, that the reality

and substance of events determine the incidence of taxation and

not formalities and remote hypothetical possibilities. Kinsey v.

Commissioner, supra at 1063; see also Jones v. United States, 531

F.2d 1343, 1346 (6th Cir. 1976) (rejecting taxpayer's attempt to

distinguish Hudspeth v. United States, supra, the court stated,

“we view a taxpayer's control over the corporation as only one

factor in determining whether a liquidation is practically

certain to occur” (fn. ref. omitted)). The court focused on the

fact that although the donee received a majority of the

corporation's shares, the donee could not have unilaterally

stopped the liquidation because it did not have the requisite

two-thirds control. Kinsey v. Commissioner, supra at 1063. The

court concluded that, considering all of the circumstances, the

transfer of stock to the donee was an anticipatory assignment of

liquidation proceeds. Id.
- 22 -

In S.C. Johnson & Son, Inc. v. Commissioner, 63 T.C. 778

(1975), the taxpayer contributed to a charitable organization two

forward sales contracts that had substantially appreciated in

value as a result of the November 1967 devaluation of the British

pound. After assignment of the currency contracts by the

taxpayer, the charitable organization entered into negotiations

with and sold the contracts to an unrelated third party. The

Commissioner asserted that the assignment of the contracts was

actually an assignment of “fixed” or “earned” income in light of

the fact that the taxpayer “could have closed out its forward

position in an economic sense after the devaluation and assured

eventual realization of gain under one of three methods”. Id. at

784, 787. First, this Court noted that the taxpayer had no legal

right to the appreciation in the contracts prior to delivery of

the British pounds on the maturity date. Id. at 786. The

inquiry, however, did not end. We determined that the taxpayer

had not taken any steps to close out its forward position under

the sales contracts prior to the gift. We also considered as

significant the donee's control over the timing of the receipt of

the income and the donee's exposure to potential liabilities in

the event of a revaluation of the British pound prior to the

maturity date. Id. at 787-788; see also Carborundum Co. v.

Commissioner, 74 T.C. 730, 742 (1980) (on facts similar to S.C.

Johnson & Son, Inc., we distinguished Kinsey v. Commissioner,

supra, and Jones v. United States, supra, because the taxpayers
- 23 -

(and, derivatively, the donees) in those cases “had virtually no

control over the course of events once the corporation's plan of

complete liquidation had been adopted”); Palmer v. Commissioner,

62 T.C. at 695 (noting that shareholder vote approving redemption

did not occur prior to gift and that donee possessed sufficient

voting power to prevent redemption, we distinguished Hudspeth v.

United States, 471 F.2d 275 (8th Cir. 1972), and Kinsey v.

Commissioner, supra, and stated, “at the time of the gift, the

redemption had not proceeded far enough along for us to conclude

that the foundation was powerless to reverse the plans of the

petitioner”). We found that there was no fixed right to income

in either a legal or an economic sense prior to the gift of the

currency contracts, and, therefore, the gift was not an

anticipatory assignment of income.

An examination of the cases that discuss the anticipatory

assignment of income doctrine reveals settled principles. A

transfer of property that is a fixed right to income does not

shift the incidence of taxation to the transferee. The reality

and substance of a transfer of property govern the proper

incidence of taxation and not formalities and remote hypothetical

possibilities. In determining the reality and substance of a

transfer, the ability, or the lack thereof, of the transferee to

alter a prearranged course of disposition with respect to the

transferred property provides cogent evidence of whether there

existed a fixed right to income at the time of transfer. 
- 24 -

Although control over the disposition of the transferred property

is significant to the assignment of income analysis, the ultimate

question is whether the transferor, considering the reality and

substance of all the circumstances, had a fixed right to income

in the property at the time of transfer. See Greene v. United

States, 13 F.3d 577, 582 (2d Cir. 1994); Allen v. Commissioner,

66 T.C. 340, 347-348 (1976).

2. The Right to Receive $22.50 a Share in Cash

On July 28, 1988, AHC, CDI Holdings, Inc. (CDI), and DC

Acquisition entered into the merger agreement. According to the

merger agreement, DC Acquisition would be merged into AHC, and

AHC would thereupon become a wholly owned subsidiary of CDI as

soon as practicable after DC Acquisition had purchased the stock

of AHC pursuant to the tender offer. The merger agreement

provided that each outstanding share of AHC stock, following the

purchase of AHC stock pursuant to the tender offer, would be

converted into the right to receive $22.50 a share in cash. On

August 3, 1988, DC Acquisition made a tender offer for the stock

of AHC at $22.50 a share. By the close of business on August 31,

1988, more than 50 percent of the outstanding shares of AHC stock 

had been tendered or guaranteed. At that time, despite the

various contingencies to be discussed infra, we believe the

reality and substance of the merger agreement and the tender

offer indicate that the stock of AHC was converted from an
- 25 -

interest in a viable corporation to a fixed right to receive

cash.

The tender or guarantee of more than 50 percent of the

outstanding shares of AHC stock was the functional equivalent to

a vote by the shareholders of AHC approving the merger. The

terms of the tender offer provided that DC Acquisition, with the

acquisition of a majority of AHC stock, could assure that the

requisite number of affirmative votes in favor of the merger

would be received even if no other shareholder voted in favor of

the merger. Therefore, with the exception of the hypothetical

possibility that a sufficient number of tendered or guaranteed

shares of AHC stock could be withdrawn, DC Acquisition was

positioned to proceed unilaterally with consummation of the

merger by the close of business on August 31, 1988. 

Shareholders who tendered their shares maintained withdrawal

rights prior to the expiration date of the tender offer. We

believe that the existence of withdrawal rights and the potential

ability of AHC shareholders to withdraw shares sufficient to make

the number of shares tendered or guaranteed fall below a majority

of the outstanding shares is analogous to the ability, in theory,

of shareholders to rescind a prior shareholder vote approving a

merger agreement or a plan of liquidation. In Hudspeth v. United

States, supra, and Kinsey v. Commissioner, 477 F.2d 1058 (2d Cir.

1973), the issue as to whether the plan of liquidation was

theoretically irreversible was not a significant factor in the
- 26 -

anticipatory assignment of income analysis. Instead, the

ability, or lack thereof, of the transferee to vitiate the

intention of the transferor and of other shareholders who voted

to liquidate the corporation was crucial to determining whether

there existed a fixed right to income at the time of the

transfer.

First, the existence of withdrawal rights with respect to

petitioners was contrary to their express intention to tender all

of their shares of AHC stock that was not exchanged for stock in

CDI and, in the case of Roger and Sybil Ferguson, to participate

in the affairs of AHC and CDI after consummation of the merger. 

The Charities' ability to vitiate petitioners' intention to

maintain the course of events that would result in the planned

merger was not enhanced by the remote and hypothetical

possibility that petitioners could exercise their withdrawal

rights against their interests. Second, petitioners had not

tendered their shares by the close of business on August 31,

1988. Notwithstanding petitioners' direct control, collectively,

of over 16.9 percent of AHC stock, the existence of withdrawal

rights with respect to petitioners was relevant only after they

tendered their shares on September 9, 1988, when over 95 percent

of the outstanding shares of AHC stock had been tendered or

guaranteed. At that time, petitioners' ability to withdraw their

shares would not have changed the fact that more than 50 percent

of the outstanding shares of AHC stock had been tendered or
- 27 -

guaranteed. That is also true for the shares tendered by the

Charities. In sum, the existence of withdrawal rights with

respect to both petitioners and the Charities did not enhance the

Charities' ability to vitiate the intention of shareholders who

had tendered or guaranteed a majority of AHC stock and in effect

approved the merger agreement.

The fact that the tender offer was conditioned on DC

Acquisition’s acquiring and owning at least 85 percent of the AHC

stock upon consummation of the tender offer (minimum tender

condition) also does not change our conclusion. The minimum

tender condition could be waived by DC Acquisition in its sole

discretion and, therefore, would not have prevented DC

Acquisition from proceeding unilaterally with consummation of the

merger by the close of business on August 31, 1988. The minimum

tender condition had no bearing on the ability of the Charities

to affect the course of events initiated on July 28, 1988, with

the merger agreement and crystallized on August 31, 1988, with

“approval” of the merger agreement by shareholders owning a

majority of AHC stock. Also, the limited significance of the

minimum tender condition from the perspective of DC Acquisition

and its impact on our determination of whether there existed a

fixed right to income at the time of the gifts is addressed in

our discussion regarding the material change condition of the

tender offer, infra.
- 28 -

Petitioners argue that Hudspeth v. United States, 471 F.2d

275 (8th Cir. 1972), and our decision in Estate of Applestein v.

Commissioner, 80 T.C. 331 (1983), stand for the proposition that

the right to merger or liquidation proceeds “matures” or “ripens”

under the anticipatory assignment of income doctrine upon the

occurrence of a shareholder vote approving the transaction. 

Petitioners assert that, in the present case, the consent of the

sole director of DC Acquisition to a resolution stating the terms

of the merger, dated October 12, 1988, was tantamount to a vote

by the shareholders of AHC for purposes of applying the legal

reasoning of Hudspeth and Estate of Applestein, and, therefore,

the right to receive merger proceeds did not mature or ripen

until that time. 

The principle set forth in the cases cited by petitioners is

not as formalistic as petitioners assert. Those cases stand for

the proposition that the reality and substance of events

determine tax consequences. The date of the shareholder votes in

Hudspeth v. United States, supra, and Estate of Applestein v.

Commissioner, supra, was crucial to determining the reality and

substance of events; however, we do not believe that application

of the anticipatory assignment of income doctrine is conditioned

on the occurrence of a formal shareholder vote. The shareholder

vote in both cases was considered sufficient to constitute a

severance of the economic gain from the investment in the

corporation, Hudspeth v. United States, supra at 279; see Estate
- 29 -

of Applestein v. Commissioner, supra at 343, 345, and not a

formalistic prerequisite. 

In Estate of Applestein v. Commissioner, supra, the taxpayer

transferred to custodial accounts for his children stock in a

corporation that had entered into a merger agreement with another

corporation. The merger agreement was approved by the

shareholders of both corporations prior to the transfer. 

Although the transfer occurred prior to the effective date of the

merger, this Court held that the “right to the merger proceeds

had virtually ripened prior to the transfer and that the transfer

of the stock constituted a transfer of the merger proceeds rather

than an interest in a viable corporation.” Id. at 346 (fn. ref.

omitted). In rejecting the taxpayer's argument that the

consummation of the merger was not a certainty, this Court

stated:

In the instant case, at the time of transfer, the

merger had been agreed upon by the directors and

shareholders of both companies and there were no other

necessary steps to be taken before the merger became

effective. Any possibilities that the merger would be

abandoned by the companies themselves or stopped by a

regulatory agency were “remote and hypothetical.” [Id.

at 346-347.]

Petitioners' attempt to impose formalistic obstacles to

application of the anticipatory assignment of income doctrine is

rejected. The absurd conclusion to petitioners' assertion that

the right to receive merger proceeds matured on October 12, 1988,

upon consent of the sole director of DC Acquisition to a
- 30 -

resolution stating the terms of the merger, is that the right to

receive merger proceeds matured subsequent to payment of those

proceeds by DC Acquisition on September 13, 1988. We believe,

instead, that when more than 50 percent of the outstanding shares

of AHC stock had been tendered or guaranteed, which in effect was

an approval of the merger agreement, and the Charities could not

vitiate the intention of the shareholders who had tendered or

guaranteed a majority of AHC stock, of petitioners, and of DC

Acquisition and CDI, the right to merger proceeds matured. When

the Charities received AHC stock on September 9, 1988, payment in

exchange for those shares pursuant to the tender offer was

imminent; i.e., 4 days from the date of the gifts. Moreover, the

Charities did not even need to tender their shares, but would

have received $22.50 a share in cash because the merger agreement

provided that shares outstanding after the tender offer would be

converted into the right to receive $22.50 in cash.

The fact that AHC shareholders may not have had a legal

right to the merger proceeds prior to acceptance of the tendered

or guaranteed shares by DC Acquisition does not change our

conclusion. The Court of Appeals for the Eighth Circuit in

Hudspeth v. United States, supra, rejected the taxpayer's

contention that the gifts preceded the time when an enforceable

right to the liquidation proceeds accrued and focused, instead,

on the fact that the donees could not change the future course of

events; i.e., the liquidation of the corporation. The inquiry in
- 31 -

S.C. Johnson & Son, Inc. v. Commissioner, 63 T.C. 778 (1975), did

not end with a determination that the taxpayer did not have a

legal right to the appreciation in the currency contracts prior

to delivery of the British pounds on the maturity date. Indeed,

this Court, among other things, considered as significant the

fact that the taxpayer had not taken any steps to close out its

forward position under the sales contracts prior to the gift. 

That inquiry would have been unnecessary if the issue as to

whether a taxpayer has a legally enforceable right to income is

dispositive of the anticipatory assignment of income analysis. 

We, therefore, consider petitioners' argument as only one factor

in our inquiry to determine the reality and substance of the

events surrounding the merger agreement, the tender offer, and

the gifts to the Charities.

Petitioners contend that DC Acquisition was not legally

obligated to accept the tendered shares and proceed with the

merger until September 12, 1988, when DC Acquisition announced

its acceptance of the tendered shares. Petitioners characterize

DC Acquisition's right to proceed with the merger as an option in

light of the material change condition to the tender offer and

the occurrence of the fire that destroyed AHC's product

manufacturing plant on August 25, 1988. Petitioners assert that

DC Acquisition waived the material change condition for the first

time when it announced acceptance of the tendered shares.

The occurrence of the fire to AHC's product manufacturing

plant and the fact that DC Acquisition and CDI proceeded with the
- 32 -

merger, notwithstanding, demonstrates the extent to which the

right to the merger proceeds was fixed once a majority of the

outstanding shares of AHC stock had been tendered or guaranteed. 

A fire that totally destroyed AHC's product manufacturing plant

could not shake the resolve of DC Acquisition and CDI in

acquiring the central asset of AHC, Sybil Ferguson and the

relationships that she had created. DC Acquisition's offering

price represented a premium of approximately 1,084 percent over

the tangible book value of AHC shares as of June 30, 1988. The

value of AHC was not embodied in the company's tangible assets. 

The value of AHC, and the asset that DC Acquisition and CDI

sought, was primarily in the person of Sybil Ferguson and the

relationships that she had created. As long as the understanding

was in place between DC Acquisition and CDI and the Fergusons

that Sybil Ferguson would maintain continued involvement with

AHC, the consummation of the merger was a foregone conclusion

once the shareholders of AHC “approved” of the merger. To accept

any other conclusion would eviscerate established principles of

the anticipatory assignment of income doctrine by ignoring the

reality and substance of events and attaching significance to

remote and hypothetical possibilities.

III. Conclusion

The reality and substance of events surrounding the merger

agreement, the tender offer, and the gifts to the Charities

indicate that the stock of AHC was converted from an interest in

a viable corporation to a fixed right to receive cash prior to
- 33 -

the date of the gifts. Therefore, petitioners are taxable on the

gain in the stock transferred to the Charities under the

anticipatory assignment of income doctrine. To reflect the

foregoing,

Decisions will be entered

under Rule 155.